Many clients come to us asking how to identify stocks to invest in. Whether you’re a market beginner or a veteran trader, learning more about how the market works is critical. Learning about how to assess different stocks and find companies to invest in will get you started on making money through trading.
When you’re looking for stocks to invest in, you should:
- decide on your investment goals,
- start with an industry that you know,
- learn some basic stock metrics,
- focus on companies that have a solid track record,
- remember that dividends matter,
- and start by investing in straightforward businesses.
Many advanced financial advisors suggest starting with a balanced portfolio, like a mutual fund, before you begin buying individual stocks. Once you have established a diversified portfolio, however, you’re ready to begin finding stocks to buy.
Read on to learn our favorite ways to find stocks to invest in, and start making cash with your trades today.
What are Stocks?
If you want to know how to search for stocks to invest in, you’ll need to learn what exactly a stock is first.
Stocks are different types of investments that you can make that represent an ownership share in a company. Investors usually purchase stocks when they think the stocks’ value will go up over time, so they can sell it and make more money. However, stocks can vary in terms of the kinds of ownership rights they grant, and whether they pay dividends, or quarterly payments that a company makes to investors out of its profits.
We suggest that investors think about every stock as belonging to one of four types. First, growth stocks are the stocks that you buy in order to sell at a higher price later on. Growth stocks are exciting because they could hit an above-average rate of growth relative to the market, not necessarily because they pay high dividends. In fact, some of the most successful U.S. companies pay out relatively little in terms of dividends. You can think of growth stocks as being kind of like real estate investments, in that you are aiming to buy and hold onto them for a while.
Second, dividend stocks, or yield stocks, are more valuable to investors for the dividends that they pay out. These stocks are the ones that will perform well in bull markets but also provide some downside protection in the bear market. You can calculate a stock’s yield by dividing the total yearly dividends that a company pays out by its share price.
Third, stocks that are being newly introduced are sometimes called new issues. Initial Public Offerings, or IPOs, are the events where companies make their stock available to the public for the first time.
Finally, defensive stocks are the ones that don’t decline as much in bear markets. Defensive stocks are usually issued by companies that sell consumer staples, and they tend to report more stable earnings as compared to the rest of the market as a whole.
We always tell our clients that they should be aiming for a balanced portfolio that pulls from these four different categories of stock. With that being said, here are some tips for how to search for good stocks to buy.
1. Decide on Your Investment Goals
The first step is to decide on your investment goals. People invest in stock for different reasons: some are looking to make a quick buck, while others are saving for retirement or want to generate a steady, long-term stream of income. Some investors are more risk-acceptant and looking to speculate to make big potential gains, while others are more defensive and are mostly looking to preserve the cash that they have, and maybe make a little extra on top of that.
Figure out your own investment goals by looking at your current life situation. If you’re young, maybe you’re looking to save up for a big purchase like a car or your first house, and put something away for retirement as well. in that case, a growth strategy is probably for you. Growth investment strategies target higher-priced stocks with plenty of growth potential.
On the other hand, if you’re nearing retirement or you’re older and looking for a supplement to your current income, an income strategy is probably the best choice. Income investors look for stable, slow-growing companies that pay dividends. Blue chip stocks often fall into this category.
2. Start with an Industry that You Know
Once you’ve identified your investment goals and strategy, it’s time to get started researching stocks and companies.
Start by looking at companies in an industry that you’re familiar with. Industries you know are a great place to start because your previous knowledge can inform the other research you do. You likely already understand the business model and how a company actually makes its profits.
Starting with an industry that you’re familiar with also helps you to avoid the hype. Lots of investors bought into the dot-com bubble without truly understanding the companies that they were investing in.
3. Learn Some Basic Stock Metrics
Trading can be full of lots of confusing jargon. You’ll probably hear investors throwing a lot of fancy terminology around, and that can be intimidating, especially for beginners.
Fortunately, there are just a few stats you need to get familiar with in order to have a basic understanding of how to choose stocks. Here are three stock metrics you should know about:
The price-earnings ratio, commonly called P/E ratio, is a great indicator of how expensive a stock is compared to its intrinsic value. You can easily calculate the P/E by taking the price per share, and dividing it by the earnings per share. In other words, this shows you how much an investor is paying for each dollar of profit from a stock. Generally speaking, a P/E of 15 or less is cheap, whereas a P/E over 20 is viewed as being on the expensive side.
Second, revenue growth refers to a company’s total sales over a given period. Simple, right? Investors like to see that a stock shows recent revenue growth, or that it will show growth in the near-term future.
Finally, dividend yield shows you the annual dividend payout of a stock as compared to the stock price. You can think about this as the percent of the stock’s value that investors will get paid back to themselves each year in the form of dividends. We usually tell our clients that the best dividend-paying stocks pay at 4% or higher. Some stocks don’t pay dividends at all, but are valuable more for their potential future growth.
4. Focus on Companies that Have a Solid Track Record
Next, when you’re looking for stocks to invest in, focus on companies that have a solid track record. Some new investors are tempted to look for the next great thing by finding a cheap, obscure stock and hoping its price will soar.
That’s usually not how it works though. Often, we only recognize a way undervalued stock after the fact. When you’re just starting out, go with companies that are solid and established. You’re less likely to lose big in this kind of trade. Look at businesses that are well-established and have been around the block. We recommend checking out companies that have shown revenue growth over at least 8 of the past 10 years.
5. Remember that Dividends Matter
While most investors are focused on the old adage ‘buy low, sell high,’ don’t lose sight of the fact that dividends matter too. Dividends are the portion of a company’s profit that it pays to its investors, often quarterly.
Dividends provide investors with an immediate return on investment. This means you’re not only reliant on long-term growth, but you’re making some income in the short- and medium-run as well. Shares that pay dividends are especially attractive to pad out your portfolio during bearish market turns.
6. Start by Investing in Straight-Forward Businesses
For your first stock purchases, look at relatively easy-to-understand business models. Examples of straight-forward businesses could include major coffee or restaurant chains and major tech companies. The idea of investing in large, stable, blue chip stocks is central to Warren Buffet’s very successful investing philosophy, so it’s worth considering.
At RagingBull, we aim to help traders of all stripes learn more about the stock market, how to get started trading stocks, and how to search for stocks to invest in. Our team of experienced professional trainers are traders themselves and are ready to guide you to making money by trading stocks.
To learn more about how to make money trading, check out RagingBull’s free eBook on options trading strategies, available for a limited time. You can also read testimonials from some of our clients to see how we’re helping our clients to become better traders and make money with stock trading.